Section 8 in higher crime areas?

Question

What are people's thoughts about buying and renting out a quadplex to section 8 tenants in a not-so-nice part of town?

This would be my first investment property. All of my upper middle class friends and relatives are telling me to run, but I think I have the temparment and the risk tolerance for a project of this type.

The plan would be to get a hard money loan for acquisition and rehab, then refi to a more conventional loan and get section 8 tenants.

Using the 2% rule and 50% maintenance rule, I think I can make the numbers work out quite well. I'm just pretty ignorant about the in's and out's of rentals on the wrong side of the tracks and would like any feedback y'all might have.

Matthew Mucker · Answer

Thanks for the feedback everyone!  The property is now under contract so the discussion is moot, but I used some conservative numbers on the back of my envelope and came up with:

Purchase Price : $95K (asking price in MLS)
Rehab Costs: $20K (guess, probably would be lower in actuality)
Closing Costs: $3K
Down Pmt: $10K

Total Cash Investment: $13K

(ignored hard money loan carrying costs, evaluated ARV refi)

15 yr term at 9% (are these reasonable numbers?)
Monthly Payment: $1064.98

Monthly Gross Scheduled Rent: $2400

Est. 50% Expenses: $1200
Est. 50% NOI: $1200
Cash Flow: $135

So, $135/mo isn't sufficient on a fourplex, but I tried to choose pessimistic numbers. If I were to pursue this, I would of course get a more firm number for rehab costs and would make a lower offer than MLS list price. Also, a 30-year term would make it cash flow quite nicely.

Were there any fatal flaws in my initial cash flow computation?

Eric Foster · Answer

It will be harder to finance all the way around… It will take more in cash to do the deal to make it happen. It will also take more time and effort (weekly) to manage this type of building.

If you think you can handle it, you probably can… But the question really is “Would it be worth it?”… My answer is no… Time = Money…

And I bet when all said and done… You will stick so much time into it that you would find that it is not worth it!

The way you have described the deal… I would pass!

P.S. Remember the “old school” real estate sayings?
1) Buy the worst house in the nicest neighborhood…
2) Location, location, location!

You are doing neither…

Sometimes my optimism also gets me into trouble too! Pass…

Tom C · Answer

NB,

You have to start somewhere. It depends on what you get the property for, how much it's going to take in rehab expenses to make it section 8 ready and what type of area are you in. One problem that you may find is getting it financed after it's rehabbed. Dont forget seasoning and its not going to be your basic SFR loan.

Are sure you can? Have you looked at the numbers closely to ensure cash flow.. There are a hundred questions that need to be answered before you know whether its worth the risk.

I would walk away if I had drug dealers hanging out on the corner or if the numbers did look right. Even section 8 tenants don't want to move into a war zone.

Matthew Mucker · Answer

Are you trying to warn me off? :)

I see great opportunity here. However, I seem to be the only one in my family that does. I don't know if that's because this is a bum steer, or because they just don't have the risk tolerance that I do.

Let me see if I can rephrase what my 'real question' is:

Is there anything about this situation that would raise red flags for experienced Section 8 landlords?  What would make an experienced Section 8 landlord run away from a property?

Maybe I can take those answers and compare them against this opportunity and see what falls out of the comparison.

Account Closed · Answer

Sounds like a lot to take on for your first rental...